Friday, February 18, 2005

Social Security - You're Both Wrong

There's been a mild debate brewing about whether Franklin Roosevelt intended Social Security to be replaced by self-supporting annuities. The idea appears to have reached popular discourse in a TechCentralStation article by Duane Freese, which was quickly followed by a Brit Hume piece on Fox News and a Wall Street Journal Political Diary posting by John Fund. On the other side, Keith Olberman, Media Matters, and Al Franken jumped in, accusing Hume of "misrepresenting FDR" and demanding that Hume resign. Since then, Megan McCardle, Kevin Drum, and others have jumped in as well.

The problem is, everyone is debating the public statement, but, as far as I can tell, no one has analyzed the actual bill that FDR was endorsing to see what FDR really had in mind. Let me break it down for you.

Al Franken is half-right

I hate to say this, but Al Franken is closer to correct on the issue of FDR's original intent than Hume and company.

The problem is that everyone is arguing solely about FDR's January 17, 1935 statement to Congress, in which FDR said:

In the important field of security for our old people, it seems necessary to adopt three principles: First, non-contributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps thirty years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.

Understandably, Hume and others have interpreted "voluntary contribution" and "self-supporting annuity plans" to mean something more like Bush's proposal than the current system.

Unfortunately, Al Franken is basically right (on this one issue, mind you). If you look at the text of the actual bill that FDR had introduced on January 17, 1935, you'll see that FDR's plan was substantially similar to the system we have today. Specifically, the proposed bill included provisions that would have:
  • established an "Old Age Fund" to "hold" and "invest" money received through payroll taxes; (Section 404)
  • paid workers retirement annuities based on their contributions to the Old Age Fund; (Section 405) and
  • most crucially, would have invested the Old Age Fund in US government bonds. (See Section 404(a), which provides that the old age trust fund shall be managed and invested in the same manner as the "Unemployment Trust Fund" and Section 604(a), which provides that the Unemployment Trust Fund shall be invested in US government bonds or in other equities for which both principal and interest are guaranteed by the United States).

To be sure, there were important differences between FDR's initial proposal and the Social Security system we have today. For example, if a worker died before collecting his or her full annuity, the remaining value of the worker's contributions and interest was supposed to go to his or her heirs. (Section 405(c)).

However, on the essential point, Franken is closer to correct than his opponents. FDR's bill anticipated that old age benefits would be paid from public taxes while the Old Age Fund built up, and from the Old Age Fund as workers who had made contributions to the fund retired, (see Sections 1-4, 405). Therefore, because the Old Age Fund was almost certainly going to be invested in US treasury bonds, each current generation of workers was essentially going to be loaning the government the money to pay the previous generation's benefits. Under his actual bill, therefore, the shift from "public funding" to "self-supporting" was largely an accounting fiction - the fund was "self-supporting" on paper, but the government bonds in the fund would be paid off with money borrowed from current workers, and their bonds would be paid off with money borrowed from future workers. It was perfectly possible to allow workers to contribute more, but if those contributions went to the "Old Age Fund," as they certainly would have, then they too would have been a paper investment similar to the current Social Security Trust Fund.

Al Franken is also, of course, half-wrong

Although I think Al Franken is right on the facts, his accusation that Hume is a "lieing liar" and should resign is absurd. If anyone is a lieing liar, it's FDR, whose original statement dressed up his social security bill in a way that caused a bunch of people to read it the way Hume, Freese, Fund and others have. (This is why the "lieing liar" formulation isn't that helpful - you take every piece of spin your opponents state and convert it into an evil lie, then either ignore your own side's spin or argue that you were forced into it by those evil guys on the other side).

My suggestions:

  • Hume, Freese, and Fund should read the original bill, then either address it or issue a correction;

  • Al Franken and Media Matter should take up yoga or something and chill; and

  • We should all try to discuss social security and Bush's proposal (once we find out what it is) on their merits.

Update: For more on the controversy, see INDCJournal, Celluloid Wisdom, Confederate Yankee, Villainous Company, etc., etc., etc.